10 reasons to run with Wall Street’s bulls

Commentary: Why this four-year-old rally is just getting started

Editor’s note: This column is the second of two parts. Read the first story on the market’s bearish signs and join Jeff Reeves today at 2 p.m. ET for a live Twitter chat on the stock market’s outlook. Follow him at @JeffReeves IP and use the #bullorbear hashtag to share your thoughts.

ROCKVILLE, Md. (MarketWatch) — There’s an old saying about Wall Street climbing a wall of worry. And right now there are plenty of worries — from sequestration to Cyprus to a China slowdown.

But these problems keep the market rally honest. Furthermore, there are a host of encouraging signs for investors who can look beyond the negative headlines.

Below are 10 reasons the market could move even higher. Feel free to share your own observations in the comments section, and for balance please read a companion piece: 10 reasons a correction could be coming.

And join me online at 2 p.m. today (Tuesday) for a live Twitter debate on the topic. Just submit your comments on either the bull or the bear case to me at @JeffReevesIP and use the hashtag #bullorbear in your tweets.

Now put on your rally cap:

1. Banks are back

Fat cat financials are unpopular, I know, but on the whole it’s good that major banks are doing better. Healthier bank balance sheets are the result of increased lending, lower loss reserves and higher capital cushions.

2. You can’t fight the Fed

Forget that blip in the Federal Reserve meeting minutes about possibly tightening policy ahead of schedule. The bottom line is that the Fed has its foot to the floor with its zero interest-rate policy and quantitative easing, and Bernanke & Co. are decidedly in favor of stocks and against interest-bearing assets.

True, some risk-averse Americans continue to sit this rally out and others have made decent money in Treasurys. But broadly, central bank policies favor stocks vs. the alternatives — and as this rally since 2009 has shown, most investors would be wise to go with the flow rather than fight the Fed while loose monetary policy reigns.

6. Manufacturing

Industrial production in 2012’s fourth quarter was much stronger than reported. Plus, durable goods orders jumped in January by the highest amount in more than a year, thanks to strong demand for machinery and manufactured metal products. U.S. Manufacturing PMI has remained in growth mode since late 2009, and recent numbers for February saw output rise at the fastest rate since March 2012.

7. Measured enthusiasm

The American Association of Individual Investors noted in its most recent sentiment survey that while bullish sentiment is high, so is bearish sentiment. Despite the Dow Jones Industrial Average
DJIA, -0.34%
hitting an all-time record, bearish sentiment recently rose to 38.5% of respondents, vs. an historical average of 30.5%. Hardly “irrational exuberance” there.

In other words, if equities can rally without the “Great Rotation” or exceptional bullishness or retail investors, it suggests that further gains are ahead, or, at worst, the gains will stick. It’s hard to claim the market is full of sheep buying anything not nailed down when you see headlines trumpeting a 100-year bear market.

8. Buybacks and buyouts

There’s cash on the sidelines as it relates to individual investors, and there’s idle cash that businesses are sitting on. Private equity is flush with cash, and corporate cash on balance sheets is double the average level.

9. New high is not a top

Recent data from Ned Davis Research reviewed the 13 highs for the Standard & Poor’s 500-stock index
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since its 1950s debut. The data show that in the worst case, the S&P 500 tacked on another 2.3% over 132 days before peaking. In the best case, the bulls marched ahead for around 7.5 more years — 2,711 days, to be exact — and added another 221.6%. The median since 1954 is 417 days and 18% upside. Granted, this sample size is small, but it’s noteworthy.

10. Stocks can rise even if the economy stalls

This final point is key: Economic growth and stock market performance are not joined at the hip. The Dow doesn’t move in tandem with GDP. Sure, there is an economic element to stocks and corporate profitability. But a recent Bank of New York Mellon report cited in The Economist showed no hard link between dividends, earnings growth or capital appreciation in the stock market.

In fact, from 1972 to 2009 the nations with the highest GDP growth rate saw stock markets deliver smaller gains than those with the lowest GDP growth rate. So much for the idea that you must have a red hot economy to support a red hot stock market.

Again, please weigh in below. I will try to respond to comments where appropriate. Also remember to read the companion piece on the current bearish signs for the market, and join the conversation on Twitter at 2 p.m. today (Tuesday) by messaging me at @JeffReevesIP and tagging your tweets with #bullorbear.

Jeff Reeves is editor of InvestorPlace.com and author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter: @JeffReevesIP. As of this writing, Reeves did not own a position in any of the stocks named here.

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